RBI issues draft guidelines for provisions on unhedged forex exposure of corporates

03 Jul 2013 Evaluate

In order to ward-off any possibility of default by corporates having unhedged forex exposure, the Reserve Bank of India (RBI) has proposed to impose an incremental provisions and capital requirements on banks, which lend to these corporates. The central bank said in its draft guidelines that corporates who do not hedge their foreign currency exposures can incur significant losses due to exchange rate volatility and increases the probability of default and thereby affecting the health of the banking system. The RBI further said that unhedged foreign currency exposures of the corporate are an area of concern not only for individual corporates but also to the entire financial system.

As per the draft guidelines, banks will have to collect information on unhedged foreign currency exposure separately from the corporates. Further, the RBI advised banks that loss to the corporate due to dollar-rupee exchange rate movement may be calculated using the annualised volatilities and has asked banks to ensure that their policies and procedures for management of credit risk factor their exposure to currency-induced credit risks and are calibrated towards borrowers whose capacity to repay is sensitive to changes in the exchange rate and other market variables. Banks have also been advised to assess their loan pricing policies to ensure that they adequately reflect overall credit risks.

The central bank came out with draft guidelines provisions and capital requirements on banks at a time when rupee is hovering at life time low level and some Indian companies are likely to incur losses due to their un-hedged foreign currency exposures. In past, the RBI had also issued various guidelines for advising banks to closely monitor the unhedged foreign currency exposures of their corporate clients and also factor this risk into the pricing. The apex bank has further directed that Banks should calculate the incremental provisioning and capital requirements at least on a quarterly basis. However, during periods of high Dollar-Rupee volatility, the calculations may be done at monthly intervals. This framework may be implemented from October 1, 2013.

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RBI issues draft guidelines for provisions on unhedged forex exposure of corporates

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